Target-date funds are increasingly available in 401(k) retirement plans, thanks to a 2007 Department of Labor ruling that gave employers the DoL's blessing to offer such as a default investment option. But, as returns in 2008 made painfully obvious, these funds often take vastly different paths to the same return profiles.
Over the weekend, the Wall St. Journal
's Anne Tergesen
offered investors a primer on these increasingly popular vehicles and even a few ideas on how these vehicles make their bets. Fees are the single biggest factor in predicting the performance of target-date funds, and portfolios encompassing funds that passively track indexes tend to outperform mopre actively traded funds, Tergesen wrote.
Tergesen cites Putnam Investments
' Retirement Ready 2020
fund's and Fidelity
's Freedom 2020
fund's 14-plus percent performances over the past year, adding that the Putnam fund, with 38 percent invested in stocks, relies in part on mutual funds that also can short stocks while the Fidelity fund uses is a buy-and-hold strategy.
Tergesen also cites new data from Morningstar Inc.
, which compared the performance of each particular fund family's target-date offerings -- from the 2010 funds intended for near-retirees to those with farther-off target retirement dates, such as 2030 or 2040 -- to the return on a benchmark index.
According to Morningstar, only seven of the 31 fund families Morningstar included in its analysis managed to beat the benchmark over the three years ended June 30. Five of the six top performers -- including target date funds from Vanguard
, Wells Fargo
-- were helped by below-average fees.
Morningstar's analysis of the portion of each fund family's performance relative to the benchmark that can't be explained by fees or asset-allocation decisions resulted in a handful of funds -- including American Funds
, T. Rowe Price Group Inc.
-- that earned positive selection scores over the past three years.
Fundsters interested in target-date funds may want to read the full article
Stay ahead of the news ... Sign up for our email alerts now